Friday, December 15, 2006

Beware Morons Writing Blogs

[Author's note: the following was posted prior to this morning's announcement that Overstock.com had sold $40 million worth of stock to institutional investors at $14.63 per share.]

Overstock.com (OSTK) leveraged buyout and takeover rumors are fairly recent. We first reported them on December 1, 2006 when the stock was still at $15.00 per share. This takeover chatter has helped drive OSTK over 10% higher in less than two weeks.

So begins a recent entry in a blog (“Stock Rumors”) that does precisely what its title suggests: it passes along rumors about stocks.

How it gets those rumors in the first place is not clear.

One thing that is clear, however, if the above-cited Overstock.com rumor is any example, is that the author of the blog is not exactly plugged into the prop desk at Goldman Sachs or the trading floor at SAC Capital.

For starters, while Overstock.com may very well at this moment be the subject of a dozen private equity investment committee meetings—so vast is the pool of private equity these days—the notion of a “leveraged buyout” as reported by the blogger is, I think, a howler, for several reasons.

Reason number one is that Overstock.com has, thus far, proven unable to report an annual profit since its 2002 public offering.

Reason number two is that Overstock.com has frittered away so much cash in the last few years—among other things by buying back its own stock at something like double the current share price—that it has less cash than convertible debt on its books.

Reason number three—and this is something Mr. Rumor apparently never bothered to check—is that Overstock.com has already collateralized “all or substantially all of the Company’s and its subsidiaries’ assets” towards obligations under a Wells Fargo Retail Finance Loan and Security Agreement, fully described in the latest 10Q. (Page 12, footnote 9.)

The restrictions of said Loan and Security Agreement are spelled out quite clearly, and might appear to the average reader to have some bearing on Mr. Rumor's ideas about Overstock.com's future:

The WFRF Agreement includes affirmative covenants as well as negative covenants that prohibit a variety of actions without the lender’s approval, including covenants that limit the Company’s ability to (a) incur or guarantee debt, (b) create liens, (c) enter into any merger, recapitalization or similar transaction or purchase all or substantially all of the assets or stock of another person, (d) sell assets, (e) change its name or the name of any of its subsidiaries, (f) make certain changes to its business, (g) optionally prepay, acquire or refinance indebtedness, (h) consign inventory, (i) pay dividends on, or purchase, acquire or redeem shares of, its capital stock, (j) change its method of accounting, (k) make investments, (l) enter into transactions with affiliates, or (m) store any of its inventory or equipment with third parties

I can't think of too many other restrictions Wells Fargo could have slapped on Overstock, except, maybe, always saying "please" and "thank you."

Still, all these do not stop Mr. Rumor from putting forth Overstock.com as a “leveraged buyout” candidate.

Nor does it stop him from mentioning Amazon.com as a possible suitor, with such blazing insights as follows:

With a market cap of almost $16B and cash of over $2B, the acquisition of OSTK for $400M or $500M that would [sic] increase its yearly revenue by almost 10% could be quite positive.

Now, maybe Amazon.com really does want to buy a money-losing outfit for “$400M or $500M”—anything can happen in this business. But Jeff Bezos has never bought a direct competitor, and he has never expressed any interest in salvaging turnarounds for the sake of juicing his company’s annual sales pace.

Nevertheless, our blogger warms to the unfettered freedom of rumor-mongering and expands his list of would-be suitors to include Google, Yahoo! and eBay. (Why he didn’t also mention Starbucks, Apple, Home Depot and Circuit City while he was at it is beyond me.)

But the best line of all comes beneath the heading, “Carl Ichan, A Possibility:” and it is written as follows:

Carl Ichan has been rumored as a possible suitor for OSTK. Recently his bid for Reckson (RA) was rejected, and he may be looking for a place to put the $1B in cash he was planning to spend on that deal. OSTK could be a good opportunity for him.

Now, you and I know that Carl Icahn is a famous corporate raider of days gone who reinvented himself as a kinder, gentler corporate activist with a terrific track record.

And you and I know that it is Carl Icahn whose “bid for Reckson was rejected.”

But Carl “Ichan”? I don't think so.

Still, the fact that he did not even get the man’s name right did not stop Mr. Rumor from the aforementioned Leveraged Buyout speculation of a company whose main lender has a rather substantial say in whatever outcome Mr. Rumor foresees from the array of takeover possibilities that appear to be sweeping the Overstock.com chat rooms.

As I say, anything can and could happen to Overstock.com and any other public company in this takeover-happy feeding frenzy of a market.

But Jim Cramer advises home-gamers to do their own homework, and I suggest both the readers of Stock Rumor.com, as well as its author, to take that wise advice.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

6 comments:

So let me get this straight - the underlying rationale here is that a company with existing debt can't be bought in an LBO? Seems to me the purchasers could always repay the existing facility with new debt (regardless of how restrictive the existing covenants are).

I've always thought this would make an interesting candidate for deep pocketed activists. The Wells Fargo provisions go a long way to clearing up why it hasn't been. Nevertheless, I still think this stock is a sure fire double if you could get a real board and CEO in place. In fact, I think the post-Byrne pop is a huge danger to being short this stock -- there aren't many companies that have such an easy and obvious pathway to a meaningfully higher stock price.

“…Overstock.com had sold $40 million worth of stock to institutional investors at $14.63 per share.”

My comment:

Just because they are institutional investors does not necessarily make them smart. Ask the institutional investors who invested in Crazy Eddie. It was not hard for us to get them to drink the Kool-Aid too.